Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

It turns out that Kung Fu Panda is capable not only of moves of mystical manual dexterity, but of protecting an industry from the most dreaded of Chinese foes: economic slowdown.

NetEase, the latest Chinese Internet company to report earnings, turned in surprisingly solid numbers amid the gloom that drove shares of the bigger players Baidu, Alibaba and Tencent down from April highs. Management celebrated with a healthy bump in dividend.

What's helped NetEase is its lack of reliance on either advertising or e-commerce, and instead its over-reliance on games. Titles including Fantasy Westward Journey, Battle to the West, The X-World, Invincible and Kung Fu Panda 3 more than doubled NetEase's gaming revenue for the first quarter. More importantly, the division returned to being the company's most lucrative, by gross margin.

Game On
NetEase's revenue from games continues to rise even as advertising and other services falter
Source: NetEase, Bloomberg

By comparison, advertising delivered more pedestrian 32 percent sales growth, marking that unit's weakest contribution to revenue in three years. This resulted in NetEase's third unit -- which provides services such as e-commerce and e-mail -- now delivering more to the bottom line than advertising.

From an economic perspective, this makes sense. While retail and advertising go hand in hand, both benefiting and suffering from macro cycles, it's likely that China's gaming industry will better withstand the headwinds. As consumers ``nest" by staying home and cutting back on unnecessary spending, games often become a cheap form of entertainment and among the last parts of a discretionary budget to be cut.

NetEase-y Money
Advertising's contribution to gross profit reached the lowest level in three years as online game revenue kept growing
Source: NetEase, Bloomberg

One risk NetEase faces is the move to mobile, because smartphone games deliver lower margins than their PC counterparts. Additionally, like any form of entertainment, the company is at the mercy of consumer tastes: It could suffer if it failed to deliver the right titles, or had to contend with stiff competition from rival offerings, leading to higher marketing expenses or lower revenues.

Either way, the dynamic is bad for Baidu (advertising) and Alibaba (e-commerce), but it could be good for the third member of the B.A.T. triumvirate. With online games giving Tencent more than half its revenue and, when combined with social networking, over 80 percent of its gross profit, the Shenzhen-based developer of the chat apps QQ and WeChat may be better equipped to tackle China's slowdown than its e-commerce and advertising-dependent peers.

When Tencent reports earnings next week, it may show investors that it's learned its own Wuxi Finger Hold.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tim Culpan in Taipei at

To contact the editor responsible for this story:
Paul Sillitoe at